- GBP / USD has fallen sharply in recent hours, but bounced off 1.4000.
- The decline is primarily the result of a recovery in the US dollar induced by higher yields on US bonds.
The GBP/USD It sold strongly in the last few hours, falling from session highs at 1.4185 set shortly after the start of the US session to hit session lows at 1.4000 in recent trade. The pair is now consolidating just below 1.4050 and is trading down about 0.75% or more than 100 pips on the day. Thursday is shaping up to be the worst day for the pound since January 15, although in the month, the pair is up more than 2.5%.
Rising US Yield Drives Dollar Recovery
US bond yields are experiencing a spectacular rebound Thursday; The yields of the 5- and 7-year bonds rose more than 17 basis points on the day, the 10-year bond rose more than 12 basis points on the day and has now recovered above 1.5% and the 30-year bond it is up more than 6 basis points on the day and is above 2.3%.
While the initial spike in bond yields (say, early last week) was possibly due to positive macroeconomic developments (i.e. markets that are betting on higher growth and inflation going forward), the recent extension of the upside appears to be more dire (ie NOT driven by positives); Traders are citing reasons for the worsening US bond market sell-off, including 1) the Fed’s indifference, 2) a terrible 7-year bond auction that showed weak investor demand for new US debt 3) systematic trend following algorithms that join the sale and 4) End of month flows.
The higher yields are not only making the USD comparatively more attractive against its peers, it is also causing concerns about overvaluation in the stock market (all major US indices have crashed on Thursday), which is resulting in a safe haven offer for the USD. This seems to be one of the main reasons why the US dollar has rallied in recent hours.
In terms of why GBP is one of the underperforming G10 currencies on the day (GBP is bearish against EUR, CHF, JPY, NZD, and CAD, as well as USD), that’s less clear. Perhaps all the market turmoil has sparked profit taking in the major sterling pairs after a solid winning streak in recent weeks thanks to the launch of the vaccine and reopening optimism. Given the fact that the launch of the vaccine in the UK puts the country’s economy in a good position to outperform most of its developed market peers since the start of the summer, investors and currency traders might look to buy any falling pound sterling.